The problem: privatization and security
When considering the privatization of an industry, governments often want to protect what they feel are vital national interests. More often than not these interests are principally political: a government might want to veto the possibility that a key utility or defence function could be bought by a foreign investor, for example. How then to privatize a company, and attract new investment into it, while ensuring that important national interests are protected?
The idea: the golden share
When the Thatcher Administration in United Kingdom launched its privatization programme, it sometimes retained a special share, often referred to as a golden share, to protect the 'public interest'.
The shares, however, are not made of gold! The nominal value is usually £1. Two types have been employed: ones without time limit, usually created to ward off unwelcome takeover bids on the grounds of national security; and those held by the government for a specific period, created to allow privatized companies time to adjust to operating in the private sector.
Golden shares do not give government any power to control privatized enterprises as they see fit. Their function is not to allow politicians to retain control over a newly-privatized business, but to prevent a specified number of dangers being realized.
For example, when Amersham International was privatized in 1982, it was the only company in the world supplying certain radioactive medical and industrial products, and some people were worried about a possible immediate takeover, creating a new private monopoly. Therefore the UK government wrote a time-protection factor into Amersham's articles of association, directing that it could not be taken over for at least five years.
Amersham shows how the golden share works. It is created by inserting a provision into the memorandum and articles of association of a company that is being privatized. It requires the holder of the share - the government - to give its permission for certain things specified in the articles to occur, such as:
Amendment of certain provisions in the articles of association (such as the existence of the share itself);
Any person being able to acquire more than a certain percentage (eg 15% or 25% of the shares);
Foreign interests being able to acquire more than a certain percentage of the shares.
Thus, for example, the golden share can be used to:
Prevent takeovers which a government judges against the public interest;
Restrict the issue of new voting shares;
Place constraints on the disposal of assets;
Impose limits on winding up or dissolution;
Ensure that the company is run by a non-foreign management;
Guarantee the place of government appointed directors on the board.
In practice, golden shares have been used to a very limited extent. Thus the non-time-limited special share in Britoil was in fact redeemed in 1990 after BP bid for the company. And the government did not exercise any of the powers it retained under its golden share in the case of Ford's takeover of Jaguar.
The idea of a golden share spread from the UK to many countries in Western Europe, and also to developing and transition economies, such as Ghana and Russia, and to Bulgaria, where the Adam Smith Institute has advised on the use of golden shares in the privatization of municipal rather than state-run companies.
Assessment: useful, but dangerous
Golden shares are not designed to be a form of disguised or vestigial state control over management. They are a means of protecting key national interests, and are limited to certain specified provisions in the company's articles of association, and confer no right to interfere on other issues.
Golden shares have their risks and their costs: the full benefits of privatization will not be realized, for example, if management is completely protected from every sort of takeover. And the device could be abused by less scrupulous governments in order to maintain political control over an enterprise while nominally privatising it (and collecting the financial proceeds from the sale).
Mindful of the dangers, the UK government tried to ensure that golden shares had a limited lifetime. It actually used the veto power of golden shares only twice. And in practice, UK governments have often chosen to surrender golden shares once privatized enterprises have become firmly established.
Golden shares can have some other disadvantages, however. For example, it may seem like a good idea to use the golden share principle to prevent any individual acquiring more than a set percentage of the shares. But if, as a result, no shareholders are able to acquire a significant stake in the business, they may be less motivated to keep a good monitoring eye on management than would a smaller number of larger shareholders.
Investors might also be wary of the potential abuse of government power through the golden share. Thus the idea was dropped from the sale of Jamaica's National Commercial Bank (see the chapter Own Your Own Bank), while the OECD complained that Romania's use of the golden share lowered the value of privatization assets considerably. The European Commission took France to the European Court of Justice over its use of a golden share to prevent foreign companies taking over Elf Aquitaine, arguing that it breached single-market laws on the free movement of capital.
For further information:
Curwen, Peter (1994) Privatization in the UK: The Facts and Figures: London: Ernst & Young (London).
Boyfield, Keith (1997) Privatization: A Prize worth Pursuing? European Policy Forum (London).
For a full catalogue of privatization techniques, see Pirie, Madsen (1997) Blueprint for a Revolution: Adam Smith Institute (London).
Adam Smith Institute
